Stability Through Turbulent Times. Interim report. Cominar real estate investment trust

Transcription

1 Stability Through Turbulent Times Interim report Cominar real estate investment trust Quarter ended SEPTEMBER 30, 2009

2 Table of contents THIRD quarter Ended SEPTEMBER 30, Message from the President and Chief Executive Officer 5 Interim Management s Discussion and Analysis 5 Introduction 5 Caution Regarding Forward-Looking Statements 6 Non-GAAP Financial Measures 6 Highlights for the Third Quarter ended September 30, Subsequent Events 7 Financial and Operational Highlights 8 General Business Overview 8 Objectives and Strategy 9 Performance Indicators 10 Performance Analysis 11 Results of Operations 16 Distributable Income and Distributions 18 Funds from Operations 19 Adjusted Funds from Operations 21 Liquidity and Capital Resources 24 Property Portfolio 25 Acquisition and Development Program 27 Real Estate Operations 30 Issued and Outstanding Units 30 Related-Party Transactions 31 Subsequent Events 31 Unitholders taxation 31 Outlook 32 Controls and Procedures 32 Significant Accounting Estimates 33 New Accounting Policies 36 Risks and Uncertainties 39 Consolidated Interim Financial Statements 44 Notes to Consolidated Interim Financial Statements 62 Corporate Information 63 Unitholder Information Photo on this page : 2001 McGill College, Montréal Photos cover page left to right: Place de la Cité, Québec City and Charest Boulevard East, Québec City Collaboration in Interim Report: Photographer: Claude Dumoulin - Médiane Design et Communication 2

3 MESSAGE FROM THE PRESIDENT AND CHIEF EXECUTIVE OFFICER Fellow Unitholders, Cominar achieved satisfactory third-quarter growth despite the impact of the financial crisis. The economic slowdown further affected the Montréal region, triggering a slight decline in the industrial property occupancy rate. Conversely, we maintained a high retail property occupancy rate due notably to the shopping centres located in the Greater Québec City Area, where the economy is still strong. This solid performance allowed us to close the first nine months of the year with a healthy balance sheet to pursue our business strategy and to remain a key player in the Québec real estate market. Our performance indicators posted solid growth Our third-quarter operating revenues grew by 11.4% to $63.1 million, reflecting the contribution of the acquisitions and developments completed in 2008 and Our net operating income reached $39.3 million, an increase of 8.8%. Same property net operating income was up by 0.9% for the quarter and by 2.0% for the first nine months of the current fiscal year. Recurring distributable income increased by 8.7% to $21.6 million; recurring adjusted funds from operations grew by 9.3% and distributions by 19.1% over the third quarter of These sound results, which were achieved under difficult economic conditions, attest to the quality and diversification of our portfolio, diversity and loyalty of our tenants, expertise and professionalism of our teams. Our overall occupancy rate remains very satisfactory As at September 30, 2009, our overall portfolio occupancy rate stood at 93.8%, remaining very satisfactory under the circumstances. This result is directly related to our implementation of an aggressive leasing strategy, as announced at the beginning of At the end of the third quarter, our leasing team had renewed 59.4% of leases expiring in 2009 and signed new leases representing 0.5 million square feet of leasable space. It should be noted that the rental rate for expiring leases is on the rise for both office and industrial and mixed-use properties. The office property occupancy rate in Québec City remains the highest among all Canadian metropolitan areas. Finally, it is worth noting that 44.4% of our third-quarter net operating income came from the Québec City and Ottawa regions, which continue to benefit from a very low unemployment rate and a stable economy. Our financial position remains healthy and solid In the third quarter, we completed an offering of 3.8 million units for proceeds of $57.5 million, followed by the $115.0 million offering of convertible debentures, the proceeds of which were used to pay down debt. As at September 30, 2009, our debt ratio remained conservative at 58.1%. Furthermore, our strong capacity to regularly generate cash flows enables us to maintain an excellent interest coverage ratio, which compares favourably with our peers; as at September 30, 2009, this ratio stood at 2.63:1 on an annualized basis. 3

4 Our ongoing developments are progressing at a steady pace Ongoing development projects representing a $97.4 million investment at a 9.4% estimated average capitalization rate will add a further leasable area of approximately 0.7 million square feet. These projects are advancing well and we do not expect any significant budget overruns at this stage. Filing of shelf prospectus and equity distribution agreement To facilitate its financing requirements, Cominar has filed a short-form base shelf prospectus entitling it to raise up to $200 million in funds over the next 25 months. This shelf prospectus enabled Cominar to implement an at-themarket equity financing program allowing it to offer up to 2,000,000 units of which the proceeds will be used principally to fund development projects. Outlook We are focused on efficiently and prudently managing our operations and will pursue our growth considering our development projects, land held for future development and solid financial position. Maintaining disciplined yet profitable growth and good liquidity are our priorities, and we continue to seek acquisition and development opportunities in line with our criteria and favourable for stability and value for the long term. That is why we are confident we will end fiscal 2009 with a sound performance on the eve of an economic recovery. Michel Dallaire, Eng. President and Chief Executive Officer 4

5 INTERIM MANAGEMENT S DISCUSSION AND ANALYSIS INTRODUCTION The following Management s Discussion and Analysis ( MD&A ) is provided to enable a reader to assess the results of operations of Cominar Real Estate Investment Trust ( Cominar, the Trust or the REIT ) for the quarter ended September 30, 2009, in comparison with the corresponding quarter of 2008, as well as its financial position at that date and its outlook. Dated November 11, 2009, this interim MD&A reflects all significant information available as of that date and should be read in conjunction with the unaudited interim consolidated financial statements and accompanying notes included in this report. Unless otherwise indicated, all amounts are in thousands of Canadian dollars, except for per unit and per square-foot amounts, and are based on financial statements prepared in accordance with Canadian generally accepted accounting principles ( GAAP ). Additional information about us, including our 2008 Annual Information Form, is available on our website at and on the Canadian Securities Administrators ( CSA ) website at The Board of Trustees, under the recommendation of the Audit Committee, has approved the contents of this interim MD&A. CAUTION REGARDING FORWARD-LOOKING STATEMENTS From time to time, we make written or oral forward-looking statements within the meaning of applicable Canadian securities legislation. We may make such statements in this document and in other filings with Canadian regulators, in reports to unitholders or in other communications. These forward-looking statements include, among others, statements with respect to our medium-term and 2009 objectives, and strategies to achieve our objectives, as well as statements with respect to our beliefs, outlooks, plans, objectives, expectations, anticipations, estimates and intentions. The words may, could, should, would, suspect, outlook, believe, plan, anticipate, estimate, expect, intend, forecast, objective, and the use of the conditional tense, and words and expressions of similar import are intended to identify forward-looking statements. By their very nature, forward-looking statements involve numerous factors and assumptions, and are subject to inherent risks and uncertainties, both general and specific, which give rise to the possibility that predictions, forecasts, projections and other forward-looking statements will not be achieved. We caution readers not to place undue reliance on these statements as a number of important factors could cause our actual results to differ materially from the expectations expressed in such forward-looking statements. These factors include business and economic conditions in Canada and elsewhere in the world, the effects of competition in the markets where we operate, the impact of changes in laws and regulations, including tax laws, successful execution of our strategy, our ability to complete and integrate acquisitions successfully, our ability to attract and retain key employees and executives, the financial position of clients, our ability to refinance our debts upon maturity and to lease vacant space, our ability to complete developments according to our plans and to raise capital to finance our growth, as well as changes in interest rates. We caution that the foregoing list of important factors that may affect future results is not exhaustive. When relying on our forward-looking statements to make decisions with respect to Cominar, investors and others should carefully consider the foregoing factors, as well as other factors and uncertainties. Additional information about these factors can be found in the Risks and Uncertainties section of this interim MD&A. Photo: 3400 Jean-Béraud Avenue, Laval An office building with a leasable area of 156,270 square feet 5

6 NON-GAAP FINANCIAL MEASURES We made disclosures in this interim MD&A regarding certain non-gaap measures, including net operating income, distributable income, funds from operations and adjusted funds from operations, which we use to evaluate our performance. Because non-gaap measures do not have a standardized meaning and may differ from similar measures presented by other issuers, securities regulations require that non-gaap measures be clearly defined and qualified, reconciled with their nearest GAAP measure and given no more prominence than the closest GAAP measure. You may find such information in the sections dealing with each of these measures. HIGHLIGHTS FOR THE THIRD QUARTER ENDED SEPTEMBER 30, 2009 Increases of: 11.4% in operating revenues 8.8% in net operating income 8.7% in recurring distributable income 11.2% in recurring funds from operations 9.3% in recurring adjusted funds from operations 19.1% in distributions Maintenance of an occupancy rate of 93.8% Annualized conservative interest coverage ratio of 2.63:1 July 8, 2009 issuance of new units for proceeds of $57.5 million subsequent to a public offering Development pipeline as at September 30, 2009 representing a total investment of $97.4 million and adding approximately 0.7 million square feet of leasable area to our portfolio Issuance of convertible debentures in aggregate principal amount of $115 million, bearing interest at 6.5%, maturing in seven years and convertible at $20.50 SUBSEQUENT EVENTS On October 29, 2009, the Trust filed a short form base shelf prospectus with securities regulators in each of the provinces of Canada. Accordingly, Cominar may, during the 25-month period that this short form base shelf prospectus remains valid, offer for sale and issue up to $200 million in the aggregate of Cominar units and subscription receipts. The specific variable terms of any offering of units or subscription receipts will be set forth in one or more prospectus supplements. On November 5, 2009, the Trust entered into an Equity Distribution Agreement with a Canadian financial institution who will act as agent for the issuance, at Cominar s discretion, of up to 2 million units by way of at-the-market distributions. The units covered by this agreement will be offered pursuant to the November 5, 2009 prospectus supplement to the short form base shelf prospectus dated October 29, On November 6, 2009, the Trust acquired a 660,000 square foot property for development, located on Pierre-Bertrand Blvd. near Highway 40, one of the main freeways of Québec City, for the cash consideration of $9.18 million. 6

7 FINANCIAL AND OPERATIONAL HIGHLIGHTS Quarter Cumulative (nine months) Periods ended September Δ% Δ% FINANCIAL DATA Operating revenues (1)(2) 63,133 56, , , Net operating income (1)(2)(3) 39,295 36, , , Same property net operating income growth (3) 0.9% 2.0% 2.0% 3.3% Net income (1) 8,860 7, ,617 18, (Recurring) distributable income (1)(3) 21,636 19, ,707 54, (Recurring) funds from operations (1)(3) 24,967 22, ,661 62, (Recurring) adjusted funds from operations (1)(3) 21,060 19, ,267 53, Distributions 19,655 16, ,439 47, Debt ratio 58.1% 57.9% Debt ratio (excluding convertible debentures) 42.0% 45.5% Total assets 1,761,388 1,509,436 Market capitalization 1,065, ,084 PER UNIT FINANCIAL DATA Net income (basic) (5.9) Distributable income (basic) (3) (9.1) Recurring distributable income (FD) (3)(4) (7.1) Recurring funds from operations (FD) (3)(4) (6.4) Recurring adjusted funds from operations (FD) (3)(4) (7.3) Distributions OPERATIONAL DATA Number of properties Leasable area (in thousands of sq. ft.) 18,547 18,215 Occupancy rate 93.8% 95.2% ACQUISITIONS AND DEVELOPMENTS Acquisitions Number of properties 1 12 Leasable area (in thousands of sq. ft.) 227 1,187 Total investment 36, ,614 Weighted average capitalization rate 8.8% 6.8% Ongoing developments Number of properties 4 4 Estimated leasable area (in thousands of sq. ft.) Forecast total investment 97,400 97,400 Forecast weighted average capitalization rate 9.4% 9.4% (1) Certain 2008 figures have been modified subsequent to the retroactive adoption of a new accounting policy. (2) Certain 2008 figures have been reclassified as discontinued operations in accordance with GAAP. (3) Non-GAAP financial measure. See relevant sections for definition and reconciliation to closest GAAP measure. (4) Fully diluted. 7

8 GENERAL BUSINESS OVERVIEW Cominar Real Estate Investment Trust is the largest owner of commercial properties in the Province of Québec. As at November 11, 2009, we owned and managed a high-quality portfolio of 215 properties including 38 office buildings, 38 retail properties and 139 industrial and mixed-use properties covering more than 18.5 million square feet in the Québec City, Montréal and Ottawa regions. Since its inception in 1998, Cominar has made a series of acquisitions and completed many construction and property development projects. Consequently, the gross carrying value of our real estate assets has increased more than sevenfold since 1998, rising from $244.6 million to over $1.9 billion as at September 30, Our asset and property management is entirely internalized and we are a fully integrated, self-managed real estate investment trust. Thus, we are not bound to a third party by management contracts or property management fees. This mode of operation reduces the potential for conflict between the interests of management and the Trust, while ensuring that the interests of management and employees are aligned with those of unitholders. The result is an improved financial performance for Cominar. OBJECTIVES AND STRATEGY OBJECTIVES Cominar s primary objectives are to provide its unitholders with growing cash distributions, payable monthly, and to increase and maximize unit value through proactive management and the growth of its property portfolio. STRATEGY To continue to ensure the growth of distributions and to increase return on investment for unitholders, Cominar strives to manage growth, operational risk and debt in a flexible and prudent manner. The key strategic elements for reaching these objectives are: Acquisition as well as construction, redevelopment and expansion of properties offering a high potential for return To increase the leasable area in its property portfolio, Cominar continues to seek acquisition, construction and development opportunities in the Québec City, Montréal and Ottawa regions. The key criterion in evaluating any acquisition or development continues to be the ratio between the acquisition or development price, the related debt and the anticipated profitability of the project over the short and long term. Cominar maintains a conservative growth strategy, based on a very strict selection of properties to be acquired and the construction and development of quality properties in locations in great demand with clients. Diversification of our property portfolio This strategic element encompasses the following: 8 [a] Activity segment diversification has been an integral part of our strategy from the beginning and consists in maintaining the right balance in our property portfolio among three activity segments: office buildings, retail properties and industrial and mixed-use properties. By diversifying its activities among three types of properties, Cominar reduces the risk associated with any given sector. This diversification contributes to steady revenue and income growth; [b] Geographic diversification While consolidating its leading position in the Québec City region, Cominar has from the outset established a major presence in the Montréal region where it owns, as at November 11, 2009, 117 properties representing a leasable area of over 11.1 million square feet. Cominar also owns four properties, representing 0.6 million square feet of leasable area, in the Ottawa region. Like activity segment diversification, geographic diversification allows Cominar to better spread its real estate risk;

9 [c] Client diversification Cominar serves an extensive and diverse client base across many industries. Clients occupy an average area of 6,800 square feet. This diversification allows for the maintenance of foreseeable cash flows. Proactive property management emphasizing growth of occupancy rates and net leasing income Commercial real estate is a dynamic investment that requires active and experienced management. With its integrated management, Cominar exercises rigorous, preventive and cost-effective control over its operations. Expanding our property portfolio enables us to achieve economies of scale and synergies. We thereby ensure delivery of efficient, costeffective services to our clients. The result is increased client satisfaction, and high occupancy and retention rates. Prudent financial management Debt management continues to be a decisive factor in growth and stability for a real estate investment trust. Cominar maintains its debt ratio below the maximum authorized under its Contract of Trust and at a level we deem prudent. We believe that this disciplined policy contributes to the stability of future distributions and to the prudent growth of the Trust. We also take a conservative approach to managing the distributions ratio, which we regard as another key factor in the stability of future distributions. This approach provides us with greater financial flexibility for our capital expenditures and for the implementation of our leasing programs. Furthermore, we opted for early renewal of our credit facility and extended our maturity date to June 19, All mortgages maturing in 2009 have been renewed. PERFORMANCE INDICATORS Cominar measures the success of its strategy using a number of performance indicators: OPERATIONAL PERFORMANCE Client satisfaction is defined as client perception and judgment of service received and demonstrates loyalty to Cominar. Two indicators are used to measure client satisfaction: occupancy rate and retention rate; the latter is calculated as the leasable area of renewed leases in relation to the leasable area of leases that expired during the year. These indicators also provide an overview of the economic well-being of the regions in which Cominar owns properties. FINANCIAL PERFORMANCE To measure its financial performance, Cominar uses the following key indicators: Same property net operating income, which provides an indication of the operating profitability of the existing portfolio, i.e. Cominar s ability to increase revenues and reduce costs, and thereby generate added value for its unitholders; Net operating income ( NOI ) margin, which provides an indication of the operating profitability of the portfolio; (Recurring) distributable income ( DI ) per unit, which represents a benchmark for investors to judge the stability of distributions; (Recurring) funds from operations ( FFO ) per unit, which represents a standard real estate benchmark to measure an entity s performance, excluding amortization calculated using historical costs from net income established in accordance with GAAP; (Recurring) adjusted funds from operations ( AFFO ) per unit, represented by funds from operations net of the investments needed to maintain the property portfolio s ability to generate rental income, which constitutes a meaningful measure of Cominar s ability to generate cash flows; and Debt ratio, which is used to assess the financial balance essential to the smooth running of an organization. Definitions and other information regarding these performance indicators are provided in the relevant sections. 9

10 PERFORMANCE ANALYSIS RESULTS OF OPERATIONS The following table summarizes our results of operations for the periods ended September 30, 2009 and 2008, and should be read in conjunction with the interim consolidated financial statements and accompanying notes presented in this interim MD&A. It should be noted that certain amounts relating to fiscal 2008 have been modified subsequent to the retroactive adoption of a new accounting policy. Other amounts have been reclassified as discontinued operations in accordance with GAAP. Quarter Cumulative (nine months) Periods ended September Δ% Δ% Operating revenues 63,133 56, , , Operating expenses 23,838 20, ,847 70, Net operating income 39,295 36, , , Interest on borrowings 13,284 12, ,513 36, Depreciation of income properties 13,609 12, ,559 37, Amortization of capitalized leasing costs 2,498 1, ,485 6, Amortization of other assets Trust administrative expenses 980 1,117 (12.3) 3,234 2, Other revenues (2.2) (21.8) Net income from continuing operations 8,860 7, ,617 18, Net income from discontinued operations Net income 8,860 7, ,617 18, Net income per unit (basic) (5.9) Net income per unit (diluted) (5.9) FINANCIAL POSITION The following table summarizes our assets and liabilities as well as unitholders equity as at September 30, 2009 and December 31, 2008, and should be read in conjunction with the interim consolidated financial statements and accompanying notes presented in this interim MD&A. September 30, 2009 December 31, 2008 Δ$ ASSETS Income properties (at amortized cost) 1,504,647 1,507,087 (2,440) Properties under development and land held for future development 171,940 93,802 78,138 Other assets 84,801 67,447 17,354 Total 1,761,388 1,668,336 93,052 LIABILITIES Mortgages payable 777, ,711 46,501 Convertible debentures 313, , ,860 Bank indebtedness 38, ,987 (148,467) Other liabilities 38,915 34,987 3,928 1,168,230 1,156,408 11,822 UNITHOLDERS EQUITY 593, ,928 81,230 Total 1,761,388 1,668,336 93,052 10

11 PERFORMANCE INDICATORS The following table summarizes our performance indicators for the quarters ended September 30, 2009 and A detailed analysis of each of these performance indicators is provided on the page indicated: Performance Indicators Quarter Cumulative (nine months) Periods ended September 30 Page Δ% Δ% Same property net operating income 12 34,538 34, ,117 98, Recurring distributable income per unit (FD) (1) (7.1) Recurring funds from operations per unit (FD) (1) (6.4) Recurring adjusted funds from operations per unit (FD) (1) (7.3) Net operating income margin % 63.7% 58.2% 59.0% Debt ratio (including convertible debentures) % 57.9% Occupancy rate % 95.2% (1) Fully diluted. RESULTS OF OPERATIONS OVERALL ANALYSIS OPERATING REVENUES We achieved strong growth of 11.4% in operating revenues during the third quarter of 2009, compared with the same period of This increase resulted mainly from the contribution of office, industrial and mixed-use property acquisitions and developments completed in 2008 and Operating Revenues Quarter Cumulative (nine months) Periods ended September Δ% Δ% Same property portfolio (1) 55,516 54, , , Acquisitions and developments 7,617 2,603 25,617 5,605 Total operating revenues 63,133 56, , , (1) The same property portfolio includes all properties owned by Cominar as at December 31, 2007, except those taken into account in the calculation of net income from discontinued operations, and does not include the benefits of acquisitions and developments completed and integrated in For the third quarter of 2009, our same property portfolio operating revenues rose 2.7% compared with the corresponding quarter of This organic growth was driven by rent increases provided for under existing leases, as well as lease renewals at higher rates and the execution of new leases, and reflects the high quality of our properties and sustained rental growth in our markets. OPERATING EXPENSES Operating expenses for the third quarter of 2009 were up 16.0% from the corresponding period of This variation stemmed mainly from the portfolio s increased size due to acquisitions and developments completed in 2008 and

12 Operating Expenses Quarter Cumulative (nine months) Periods ended September Δ% Δ% Same property portfolio (1) 20,978 19, ,639 69, Acquisitions and developments 2, ,208 1,778 Total operating expenses 23,838 20, ,847 70, (1) See Operating Revenues. NET OPERATING INCOME Although net operating income ( NOI ) is not a financial measure defined by GAAP, it is widely used in the real estate industry to assess operating performance. We define it as operating income before interest on borrowings, depreciation of income properties, amortization of capitalized leasing costs and other assets, Trust administrative expenses and other revenues. This definition may differ from that of other issuers and, therefore, Cominar s NOI may not be comparable to similar measures presented by such other issuers. Net Operating Income Quarter Cumulative (nine months) Periods ended September Δ% Δ% Same property portfolio(1) 34,538 34, ,117 98, Acquisitions and developments 4,757 1,885 15,409 3,827 Total NOI 39,295 36, , , NOI margin Same property portfolio 62.2% 63.3% 58.0% 58.7% Overall portfolio 62.2% 63.7% 58.2% 59.0% (1) See Operating Revenues. Same property NOI (a financial performance indicator) rose 0.9% in the third quarter of 2009 compared with the same period in The same property NOI margin fell 1.1% compared with the same period of 2008, due primarily to a slight increase in the vacancy rate. For the nine-month period ended September 30, 2009, same property NOI was up 2.0% from the corresponding period in 2008, while the NOI margin stood at 58.0% of operating revenues, down slightly from the same period of NOI margin showed a slight decrease and NOI same property portfolio growth was somewhat slower due to a slight decline in occupancy rates, especially in the industrial activity segment in the Montréal region. INTEREST ON BORROWINGS For the third quarter of 2009, total interest on borrowings increased 6.2% compared with the third quarter of 2008, owing primarily to the various financing agreements entered into or assumed in connection with the settlement of recent acquisitions. Total interest on borrowings represented 21.4% of operating revenues as at September 30, 2009, which compares favourably with our peers. By comparison, the rate stood at 21.0% of operating revenues as at September 30, As at September 30, 2009, the weighted average contractual interest rate of our long-term debt stood at 5.50%, down 13 basis points from December 31,

13 The following table indicates the source of interest on borrowings presented in our financial statements for the periods indicated: Interest on Borrowings Quarter Cumulative (nine months) Periods ended September Δ% Δ% Mortgages and bank indebtedness 11,606 9, ,031 28, Convertible debentures 3,261 3, ,458 9, Amortization of borrowing costs ,053 1, Accretion of liability component of convertible debentures Amortization of fair value adjustments on assumed mortgages payable (30) (32) (6.3) (92) (95) (3.2) Less: Capitalized interest (2,290) (781) (4,967) (2,834) 75.3 Less: Interest related to discontinued operations (30) (90) Total interest on borrowings 13,284 12, ,513 36, DEPRECIATION OF INCOME PROPERTIES During the third quarter of 2009, depreciation expense in respect of income properties rose 8.2% compared with the same period in It should be noted that since September 2003, the CICA requires that the purchase price of an income property be allocated between tangible assets comprising the land and the building, and intangible assets such as operating leases and client relationships. These intangible assets are amortized on a straight-line basis over the terms of related leases. The resulting amortization is therefore accelerated relative to the depreciation of properties held for a number of years. Depreciation of Income Properties Quarter Cumulative (nine months) Periods ended September Δ% Δ% Same property portfolio 11,115 11,830 (6.0) 34,125 35,517 (3.9) Acquisitions and developments 2, ,434 2,140 Total depreciation of income properties 13,609 12, ,559 37, TRUST ADMINISTRATIVE EXPENSES Administrative expenses amounted to $3.2 million for the period ended September 30, 2009 compared with $3.0 million for the same period in This increase resulted primarily from a higher headcount arising from acquisitions and developments completed during 2008 and Despite this increase, Trust administrative expenses represented only 1.6% of operating revenues for the first nine months of 2009, compared with 1.7% for the same period of DISCONTINUED OPERATIONS In accordance with CICA Handbook Section 3475, the results of discontinued operations must be reclassified as a separate component of net income for the fiscal year in which the sale of these operations took place, as well as for the previous year presented for comparative purposes. Accordingly, net income related to a retail property sold in October 2008 was presented under net income from discontinued operations. NET INCOME Cominar s net income for the quarter ended September 30, 2009 was $8.9 million, up 12.3% over the corresponding period of Basic net income per unit stood at $0.16, down $0.01 from the same period in 2008 due to the dilutive effect of recent unit issues in

14 Net Income Quarter Cumulative (nine months) Periods ended September Δ% Δ% Net income 8,860 7, ,617 18, Net income per unit (basic) (5.9) Net income per unit (diluted) (5.9) CONTINGENCY In June 2006, an expropriation process was initiated by the Centre hospitalier de l Université de Montréal (the CHUM ) for the property located at 300 Viger Street in Montréal, Québec. The expropriation procedure is currently at the definitive indemnity setting stage. Cominar was served with a property transfer notice on August 27, 2007, with an effective date of September 1, 2007, and the Québec Administrative Court awarded Cominar, on September 10, 2007, a provisional indemnity pursuant to applicable legislation. The provisional indemnity of $30 million was received in The definitive indemnity will be set by the Québec Administrative Court or settled between the parties in At this stage, it is impossible to estimate or assess the amount of the definitive indemnity and, consequently, Cominar has recognized no gain or loss in connection with this expropriation. SEGMENTED ANALYSIS Cominar s activities encompass three categories of real estate properties located in the Québec City, Montréal and Ottawa regions. The following tables show the contributions of these properties to NOI, by activity segment and geographic markets, for the quarters ended September 30, 2009 and Variations are primarily attributable to acquisitions completed in 2008 and SEGMENTED INFORMATION BY ACTIVITY SEGMENT Net Operating Income Quarter Cumulative (nine months) Periods ended September Δ% Δ% Activity segment Office 18,342 14, ,789 41, Retail 7,264 7, ,923 20, Industrial and mixed-use 13,689 14,368 (4.7) 39,814 39, Total NOI 39,295 36, , , Quarter Cumulative (nine months) Periods ended September Activity segment Office 46.7% 40.1% 47.4% 41.1% Retail 18.5% 20.1% 18.1% 20.3% Industrial and mixed-use 34.8% 39.8% 34.5% 38.6% Total NOI 100.0% 100.0% 100.0% 100.0% 14

15 Office Segment For the third quarter of 2009, NOI from office properties was up 26.6% compared with the corresponding period of 2008, due mainly to the contribution of two properties acquired in October 2008 and January Quarter Cumulative (nine months) Periods ended September Δ% Δ% Operating revenues 30,885 24, ,760 74, Operating expenses 12,543 9,940 26,2 41,971 32, NOI Office 18,342 14, ,789 41, NOI margin Office 59.4% 59.3% 56.6% 56.2% Retail Segment Retail segment NOI remained stable in the third quarter of 2009 relative to the corresponding period of Quarter Cumulative (nine months) Periods ended September Δ% Δ% Operating revenues 12,111 11, ,220 35, Operating expenses 4,847 4, ,297 14, NOI Retail 7,264 7, ,923 20, NOI margin Retail 60.0% 61.1% 57.8% 58.2% Industrial and Mixed-Use Segment Industrial and mixed-use segment NOI fell 4.7% in the third quarter of 2009, reflecting lower operating revenues compared with the corresponding period of 2008 resulting primarily from a slight decline in the occupancy rate in this activity segment, particularly in the Montréal region. Quarter Cumulative (nine months) Periods ended September Δ% Δ% Operating revenues 20,137 20,363 (1.1) 65,393 62, Operating expenses 6,448 5, ,579 23, NOI Industrial and mixed-use 13,689 14,368 (4.7) 39,814 39, NOI margin Industrial and mixed-use 68.0% 70.6% 60.9% 62.7% SEGMENTED INFORMATION BY GEOGRAPHIC LOCATION The following table shows NOI growth and breakdown in Cominar s three geographic markets. Net Operating Income Quarter Cumulative (nine months) Periods ended September Δ% Δ% Region Québec 15,283 15, ,783 42, Montréal 21,839 18, ,206 52, Ottawa 2,173 2,255 (3.6) 6,537 6, Total NOI 39,295 36, , ,

16 Quarter Cumulative (nine months) Periods ended September Region Québec 38.9% 41.8% 37.9% 41.8% Montréal 55.6% 51.9% 56.4% 51.9% Ottawa 5.5% 6.3% 5.7% 6.3% Total NOI % 100.0% 100.0% 100.0% DISTRIBUTABLE INCOME AND DISTRIBUTIONS Although the concept of distributable income ( DI ) is not a financial measure defined under GAAP, it is a measure widely used by investors in the field of income trusts. We consider DI an excellent tool for assessing the Trust s performance. Given its historical nature, DI per unit is also a useful benchmark enabling investors to evaluate the stability of distributions. The following table presents the calculation of DI in accordance with the terms of the Contract of Trust as well as its reconciliation with net income calculated in accordance with GAAP: Distributable Income Quarter Cumulative (nine months) Periods ended September Δ% Δ% Net income (GAAP) 8,860 7, ,617 18, Depreciation of income properties 13,609 12, ,559 37, Amortization of below-market leases (193) (131) 47.3 (572) (384) Compensation expense related to unit option plan (38.1) (9.4) + Accretion of liability component of convertible debentures Rental income recognition of leases on straight-line basis (729) (595) 22.5 (2,267) (2,131) Amortization of fair value adjustments on assumed indebtedness (30) (32) (6.3) (92) (95) (3.2) Recurring DI 21,636 19, ,707 54, DISTRIBUTIONS TO UNITHOLDERS 19,655 16, ,439 47, Distributions reinvested under the distribution reinvestment plan (377) (833) (54.7) (1,078) (2,053) (47.5) Cash distributions 19,278 15, ,361 45, Per unit information: Recurring DI (basic) (9.1) Recurring DI (FD) (1) (7.1) DISTRIBUTIONS PER UNIT DI payout ratio 90.0% 81.8% 90.0% 87.7% (1) Fully diluted. 16 Recurring DI for the third quarter of 2009 amounted to $21.6 million, up 8.7% from the corresponding period of 2008, due mainly to the impact of acquisitions and developments completed since the beginning of 2008 and to the 0.9% increase in same property NOI. Recurring DI per fully diluted unit for the third quarter of 2009 stood at $0.39 compared with $0.42 for the same period of This decline in per unit income arises primarily from the dilutive effect of unit issues in Management expects that per unit income will improve when the proceeds of these issues are invested in additions to income properties and/or when development projects are integrated into income properties.

17 Distributions to unitholders totalled $19.7 million, up 19.1% from the same period of 2008, with per unit distributions remaining at $0.36. Cominar continuously tailors its growth strategy to market conditions. To offset the significant rise in property prices in recent years, the Fund is committed to construction projects, particularly in the Québec City region. This growth strategy is implemented by the purchase of land for future developments when favourable opportunities arise, both in terms of location and price. However, the substantial investments made during project development phases do not contribute to income growth until projects are completed. Cominar takes a conservative approach to managing the distributions ratio, which it regards as a key factor in the stability of future distributions. This approach provides greater financial flexibility for our capital expenditures and the implementation of our leasing programs. As at September 30, 2009, the DI payout ratio stood at 90.0%, slightly higher than the corresponding period of This increase is due primarily to the dilutive effect of units issued under two public offerings in Track Record of DI per Unit (Financial Performance Indicator) Nine-month periods ended September DI per unit (basic) Recurring distributable income per unit (FD) (1) (1) Fully diluted. Cominar s recurring DI per unit, established in accordance with its Contract of Trust, is in our opinion a useful tool for assessing the Trust s operating performance because it highlights per unit cash flows that are distributable to unitholders. Furthermore, given its historical nature, it is also a useful benchmark for determining the stability of distributions. On July 6, 2007, the CSA issued an amended version of National Policy , Income Trusts and Other Indirect Offerings, which includes guidelines on distributable cash. Under amended National Policy , the Trust is required to reconcile distributable income (a non-gaap measure) with cash flows from operating activities as shown in the financial statements. The following table presents this reconciliation: Quarter Cumulative (nine months) Periods ended September Cash flows from operating activities (GAAP) 33,998 29,681 56,999 52,022 - Amortization of capitalized leasing costs (2,498) (1,980) (7,485) (6,223) - Amortization of capitalized financing costs and other assets (836) (438) (2,344) (1,366) - Rental income recognition of leases on straight-line basis (729) (595) (2,267) (2,131) + Change in non-cash working capital items (8,299) (6,766) 14,804 12,122 Distributable income 21,636 19,902 59,707 54,424 Rental income recognition of leases on straight-line basis results from straight-line accounting for rent increases set forth in leases. As Cominar does not collect these amounts during the period, they are deducted from net income in the calculation of DI. Although amortization of capitalized leasing costs, capitalized financing costs and other assets are non-cash items, Cominar deducts them in the calculation of DI, as this amortization expense must be excluded from cash flows available for distribution to unitholders. 17

18 As non-cash working capital items tend to fluctuate over time, Cominar expects that these items should not affect distributions to unitholders. Therefore, Cominar does not consider them in the calculation of DI. In accordance with CSA guidelines, Cominar also provides the following table to allow readers to assess the source of cash distributions and how they relate to net income: Nine-month periods ended September Cash flows from operating activities 56,999 52,022 58,906 Net income 20,617 18,838 22,882 Distributions to unitholders 54,439 47,963 39,224 Cash flows from operating activities in excess of distributions to unitholders 2,560 4,059 19,682 For the fiscal year ending December 31, 2009, Cominar expects that its cash flows from operating activities will suffice to finance distributions to unitholders, as has been the case for every fiscal year since the inception of the REIT. Cominar considers that the comparison of distributions with net income is not indicative of its capacity to pay sustained distributions to unitholders. The difference between distributions, calculated on the basis of DI, and net income, is primarily attributable to non-cash items, as shown in the reconciliation between net income and DI. FUNDS FROM OPERATIONS Although the concept of funds from operations ( FFO ) is not a financial measure defined under GAAP, it is widely used in the field of real estate investment trusts. The Real Property Association of Canada ( REALpac ) defines this measure as net income (calculated in accordance with GAAP) before depreciation of income properties and amortization of capitalized leasing costs, as well as realized gains (or impairment provisions and losses) from sales of depreciable real properties and extraordinary items. FFO should not be substituted for net income or cash flows from operating activities established in accordance with GAAP in measuring our performance. While our method of calculating FFO is in compliance with REALpac recommendations, it may differ from that applied by other issuers. Therefore, it may not be useful for comparison with other issuers. We consider FFO a meaningful additional measure of operating performance, since it excludes the assumption that the value of real estate assets diminishes predictably over time and discounts certain items included in net income, established in accordance with GAAP, that are not necessarily indicative of our operating performance (for example, gains or losses from the sale of real estate assets). The following table presents a reconciliation of net income, as determined in accordance with GAAP, and FFO for the periods ended September 30, 2009 and 2008: Funds from Operations Quarter Cumulative (nine months) Periods ended September Δ% Δ% Net income (GAAP) 8,860 7, ,617 18, Depreciation of income properties 13,609 12, ,559 37, Amortization of capitalized leasing costs 2,498 1, ,485 6, Recurring FFO 24,967 22, ,661 62, Per unit information: Recurring FFO (basic) (6.1) Recurring FFO (FD) (1) (6.4) (1) Fully diluted.

19 For the third quarter of 2009, FFO rose 11.2% from the same period in 2008 due to acquisitions and developments completed during 2008 and 2009, and organic growth. Recurring FFO per unit fell by 6.4% on a fully diluted basis compared with the third quarter of 2008 due primarily to the dilutive effect of unit issues in For the first nine months of 2009, recurring FFO per fully diluted unit rose 2.3%. Track Record of Funds from Operations per Unit (Financial Performance Indicator) Nine-month periods ended September FFO per unit (basic) Recurring FFO per unit (FD) (1) (1) Fully diluted. ADJUSTED FUNDS FROM OPERATIONS The concept of adjusted funds from operations ( AFFO ) is fast becoming a key financial measure in the field of real estate investment trusts. Cominar defines this measure as FFO adjusted for non-cash items such as compensation expense related to the unit option plan, rental income arising from the recognition of leases on a straight-line basis and amortization of above-market leases, net of the investments required to maintain Cominar s ability generate rental income from its property portfolio. AFFO is an additional indicator to assess Cominar s financial performance and its ability to maintain and increase distributions over the long term. AFFO is not a measure defined under GAAP and should not be substituted for net income or cash flows from operating activities established in accordance with GAAP in measuring our performance. Our method of calculating AFFO may differ from the methods used by other trusts and, therefore, may not be useful for comparison. Cominar considers the amortization of capitalized leasing costs expensed during a period to be a realistic estimate of the expenses a REIT must continually incur to maintain its ability to generate rental income. Since such amortization represents the spreading over the lease term of amounts incurred irregularly over time (lease maturities, occupancy rates, etc.), the Trust believes that there is a better correlation between cash flows from leases and the investments required to generate such cash flows. Cominar s January 2009 adoption of the recommendations of new Section 3064, Goodwill and Intangible Assets, prompted it to review its AFFO calculation. As of January 1, 2009, the Trust deducts the capital expenditures incurred representing the investments made in connection with its program to maintain its capacity to generate rental income from its property portfolio. These expenditures, which primarily include major expenditures for maintenance and repairs, are typically incurred unevenly during a fiscal year. Therefore, AFFO could vary from quarter to quarter and such variances could be material. Prior-period AFFO has been restated to reflect this change. 19

20 The following table presents a reconciliation of FFO and AFFO for the periods ended September 30, 2009 and 2008: Adjusted Funds from Operations Quarter Cumulative (nine months) Periods ended September Δ% Δ% Funds from operations 24,967 22, ,661 62, Compensation expense related to unit option plan (38.1) (9.4) - Rental income recognition of leases on straight-line basis (729) (595) 22.5 (2,267) (2,131) Amortization of below-market leases (193) (131) 47.3 (572) (384) Amortization of capitalized leasing costs (2,498) (1,980) 26.2 (7,485) (6,223) Capital expenditures maintenance of rental income generating capacity (596) (651) (8.4) (1,502) (1,344) 11.8 Recurring AFFO 21,060 19, ,267 53, Per unit information: Recurring AFFO per unit (basic) (7.1) Recurring AFFO (FD) (1) (7.3) DISTRIBUTIONS PER UNIT AFFO payout ratio 92.3% 85.7% 92.3% 89.9% (1) Fully diluted. Cominar reported $21.1 million in recurring AFFO for the third quarter of 2009, up 9.3% compared with the corresponding period of Recurring AFFO per unit stood at $0.39, down 7.1% compared with the third quarter of This decline in per unit income arises primarily from the dilutive effect of share issues in Management expects that per unit income will improve when the proceeds of these issues are invested in additions to income properties and/or when development projects are integrated into income properties. The following table presents the Trust s AFFO per unit for the periods ended September 30, 2009 and 2008: Track Record of Adjusted Funds from Operations per Unit (Financial Performance Indicator) Nine-month periods ended September AFFO per unit (basic) Recurring AFFO per unit (FD) (1) (1) Fully diluted. 20

21 LIQUIDITY AND CAPITAL RESOURCES LONG-TERM DEBT The following table presents Cominar s debt balances as at September 30, 2009, including mortgages payable and convertible debentures, by year of maturity and weighted average contractual interest rates: Long-Term Debt Balance of Balance of Weighted average Maturity convertible debentures ($) mortgages payable ($) contractual interest rate (%) , , , , ,844 89, , ,000 12, , , , , , Total 327, , As at September 30, 2009, the weighted average contractual interest rate of our long-term debt stood at 5.50%, down 13 basis points from December 31, MORTGAGES PAYABLE As at September 30, 2009, mortgages payable amounted to $778.7 million, up $46.4 million from $732.3 million as at December 31, As of the date hereof, the weighted average contractual interest rate was 5.26%, down 32 basis points from 5.58% as at December 31, Cominar has staggered mortgage maturity dates over a number of years to reduce the risks related to renewal. As at September 30, 2009, the residual average term of mortgages payable was 6.3 years. The following table presents the changes in mortgages payable in 2009: Mortgages Payable Quarter Cumulative (nine months) Weighted average Weighted average contractual interest contractual interest Periods ended September 30, 2009 $ rate (%) $ rate (%) Balances of mortgages payable beginning of period Mortgages payable contracted or assumed Repayments of balances at maturity (47.1) 5.53 Monthly repayments of principal (5.2) (14.5) Balances of mortgages payable end of period